What is money, where does it come from and why is it important?
Patricia & Christian talk to award-winning primary MMT academic Professor L. Randall Wray about his latest book “Making Money Work For Us” and his part in the new academic collaboration “Modern Monetary Theory – Key Insights, Leading Thinkers.”
Transkripzioa:
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Adam Smith and The Wealth of Nations that there’s this strange thing going on in the colonies they are issuing paper
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money it can circulate and retain its value the colonies knew what they were
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doing they would authorize printing up Virginia notes and at the same time they
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would accept back the notes in payment of taxes and then what did they do with
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the notes they burned them all they were not collecting tax revenue to get money
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to spend tax insured that there would be a demand for the currency so the answer
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to Smith’s puzzle why does it retain its value well people needed to pay the tax
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the U.S can’t run out of dollars now what can we run out of the same thing
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every country can run out of resources could the US produce the real stuff that
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they need and right now the answer is pretty clear that we can and
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[Music] this is the mmt podcast with Patricia
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Pino and Christian Riley
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hi I’m Christian Riley and welcome to the modern monetary Theory podcast you
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big thank you to all of our supporters so far and thanks as ever for the time
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you put into understanding mmt let’s dive in welcome one and all to the mmt
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podcast I’m Christian Riley and I’m Patricia Pino and we’re honored to be joined today by Economist primary mmt
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academic and author of many key works including the book that gave modern money Theory its name so we are utterly
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privileged to welcome back to the show Professor L Randall Ray hi Randy hey good to be on so let’s start with your
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recent book which is called making money work for us and congratulations on the
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book it’s such a great read and really accessible but your first chapter heading is one of my favorite questions
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of all time which is what is money now as someone who’s been answering that
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question since the 1980s as I read it what is money well first all money is
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debt so it’s a credit debt relation um this is their approach that I think
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really comes out of history of money the anthropology of money the sociology of
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money so really every field that is studied money I think comes to this
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conclusion it’s just economists who’ve had a very hard time understanding this
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gold is not money Bitcoins are not money it has to be a debt and so we see bank
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money as a debt of the bank currency as a debt of the government reserves as the debt of central banks
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and in the book I say it’s sort of nice to think of this if you’re holding
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currency you are the Creditor and the government is your debtor and in the book you draw a distinction between
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money and money things could you talk about that sure that’s actually from John Maynard Keynes who made this
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distinction so we can think of money as a measuring unit what does it measure
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deaths and credits and so it’s we’re focusing on money as a
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unit of account and so in a way it’s like the inch or centimeter that is a
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measuring unit and money is a measuring unit of debts and credit by money saying
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what Keynes meant was how do we keep a record of that debt or credit we don’t
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want to rely on Memories We want to write it down and so over time we use a
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wide variety of Technologies to record the debts such as clay tablets
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wooden tally sticks metal coins and paper money so a wide variety of ways of
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recording it today it’s mostly electronic entries that is the money thing the way that we keep track well
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the fact that we have a lot of definitions of money and very often across like kind of the economics texts
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they have this quantity of money theory of inflation and they often struggle
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with identifying what the m in that equation is and over time I think it’s got expanded into first it was just the
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most liquid money and then it got expanded into things that could be easily converted into money and recently
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mmt also talks about government bonds as being a type of money how would you go about addressing that it why is it so
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controversial to add the notion of government bonds as money to today’s economic kind of theories okay well
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typically the Orthodox approach begins with the functions of money so money is what money does and the
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things that satisfy those functions have changed over time and they recognize
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that and so that’s what creates a problem for them because they’re
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focusing on the functions of money whereas we are saying that what is most
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important is that money is a record of indebtedness and it doesn’t matter what
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technology we use if it’s a measurement of indebtedness and then it’s money we
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can think of three dimensions of the many things that we’re talking about
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that is the Money Records one is liquidity the second is transferability
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and the third is yield and liquidity means how quickly could you change that
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money record to the government’s currency and if we
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talk about checking deposits which are called demand deposits by economists that word demand tells you something you
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can convert them on demand really really quickly okay today as fast as you can
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get to that ATM machine you can convert it to cash and at least say your own bank in the United States there’s no
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cost to doing this okay so that’s very liquid if we talk about transferability that means can you transfer it to
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someone else and of course that’s very easy to do with cash that can be passed
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hand to hand and you can write checks on your bank account and so we can say that
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bank deposits are easily transferable and then finally there is the yield
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which is the interest you can get you get zero on cash you can get maybe a little bit on your demand deposit a
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little bit more on a safe spot so anyway the things that are the most liquid the
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most transferable and have the lowest yield are the ones that I would want to
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call money and there’s some arbitrariness in this of necessity
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because we’re talking about three different characteristics and we’re talking about the degree of each one of
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those we can think of a money pyramid where at the very top of that pyramid we’ve got the government’s currency and
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we probably also want to put the central bank’s reserves which are just deposits that private Banks hold at the central
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bank that’s at the very top of the pyramid and then a bit below that we’ve got Bank checking deposits a little bit
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further down me about Bank savings deposits and other kinds of time deposits and then we have other kinds of
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financial institutions such as money market mutual funds are probably a bit
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lower in the period and on down until we get to the government bonds lie which
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are easy to sell but you could take a loss a capital loss depending on which
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way interest rates have gone I don’t get too much into Financial Theory but it’s
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possible that you take a bit of a loss when you sell your government bonds and then corporate bonds and so on so it is
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somewhat arbitrary where we draw that dividing line with the government bonds if you called it to maturity you will
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always get face value does that factor into the three dimensions of money I’m talking about if you for some reason you
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needed to sell it you needed some cash then you don’t necessarily get what you
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paid so it’s not that the government’s going to default or anything like that it’s just that interest rates can move
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and depending on the term to maturity that can have a bigger effect on the
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price you could get at a point in time you can always hold it to maturity and get what is promised and get interest in
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the meantime yes okay so anyway it’s somewhat arbitrary I wouldn’t include
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bonds as money because there’s the possibility of capital loss and it takes
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a bit of effort to convert them to cash I was just wondering what implications that had for the notion that that money
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is exogenous or not whether if we say that that we do have control over the quantity of bonds against the quantity
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of ourselves and are we saying that we have some exogenous control over the money supply or not well it depends on
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the central banks goals if the goal of the central bank is to hit interest rate
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targets which they all admit is what they’re trying to do now and if the goal
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of the sen Central Bank is to have the payment system operate very smoothly so that checks
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clear so that Banks can clear accounts with other Banks
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then the central bank is not able to control the quantity of Reserves at all
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even though reserves are their liability and you and in the old days economists used to think that well it’s their
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liability they could choose not to issue a liability but that’s actually not true because
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central banks do care about impacts on interest rates and they do care in fact probably they’re overriding concern is
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always to have a smoothly function payment system where checks don’t bounce
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I mean I’m talking about as long as they’re good checks they want to make sure that the check’s clear they always
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want to make sure that treasury checks clear that’s the most important one and that means they will have to supply
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reserves as necessary to allow the clearing to take place and that in turn
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means that they actually don’t have control over it the term exogenous has
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several different meanings so one of those meanings is just simply outside
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the private market economy and in that sense yeah we would say that the central
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bank is outside that private market economy and so it’s exogenous in that sense so turning to taxes in taxation in
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the book you write quote keep this in mind taxes are for Redemption not Revenue what does redemption mean in
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this context yeah well Redemption means that you are returning and I owe you to
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the issuer and this I would say is a fundamental law this is what a Mitchell
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Ennis claimed a fundamental law of all debt and that is that the issuer of a
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debt must take a back end payment and if you owe somebody if you can get their
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debt you can get yourself out of debt to them by delivering back to them their
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own IOU and so we’re talking about the government if you have a tax that you
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owe to the government you can get yourself out of tax debt by getting hold
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of the government’s debt namely currency and delivering that back to the
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government if we go back to the American colonies they were the the first big
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issuers of paper money in the west the Chinese had been doing it for hundreds
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of years before but in the west it was a new thing it was even noticed by Adam Smith In The Wealth of Nations in 1776
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he said there’s this strange thing going on in the colonies they are issuing paper money and even if they don’t
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promise to redeem for gold it can circulate and retain its value
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and the colonies knew what they were doing they would authorize printing up
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say ten thousand pounds of Virginia notes in the case of the colony Virginia and at the same time they would pass a
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new tax law that they called Redemption taxes that were expected to raise about
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ten thousand pounds they would accept back the notes in Redemption that is
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payment of taxes and so they got back the paper notes in tax revenue and then
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what did they do with the notes they burned them all which makes it very clear they were not
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collecting tax revenue to give money to spend they were collecting tax revenue
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to get money to burn now why were they doing that tax insured
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that there would be a demand for the currency and taking the currency out of
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the economy ensured that it wouldn’t stay in the economy and possibly cause inflation and
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so that was the answer to Smith’s puzzle why does it retain its value well people
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needed to pay the tax and once they’ve paid the tax they burn it so it can’t
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cause the value of the currency to go down speaking of debts and Redemption also in your book because this is the
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first time I’ve come across this I have to ask what is the Saudi principle okay
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so Saudi was a scientist but he came up with this argument that interest trumps
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growth and so if you think about it debts that promise to pay interest grow
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at the rate of interest so if you borrow a hundred dollars and you promise to pay
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10 interest your debt is going to grow at a rate of 10 percent it’s going to
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get 10 bigger every year now actually more than that if it’s compounded frequently okay and his argument was if
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you look back in time say in Babylonia for example where we have the first
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records of written records of debt and we know a fair amount about their
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monetary system the interest rate was say 20 percent now we know that ancient
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societies grew extremely slowly so slowly that you really wouldn’t notice
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any economic growth over your lifetime it’s only the last few hundred years
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where growth is rapid enough that you actually can see it and notice it and
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that’s basically when the whole field of Economics was founded it was founded
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once economies grew fast enough that you could see it but anyway going back to
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his argument with an a High interest rate and an extremely low growth rate
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it’s very obvious that debts are going to grow much faster than the ability to
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make the payments and that’s exactly what happened and that is why ancient
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societies always had a principle of debt cancellation in the Year of
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Jubilee Michael Hudson has written a lot about this and the purpose of that was
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to essentially restart time cancel the debts to restore they were thinking what
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we’re doing is restoring the natural order of things because we recognize it’s not possible to pay the debts now
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in more recent times when our economy is doing well we probably do grow faster
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than the interest rate but often we don’t and what that means is the debts
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are going to grow faster than GDP which is our measure of economic output but
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even when GDP and the aggregate is growing faster for many people their own
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income is not growing as fast as their debt is growing because of the interest rate and what that means is that they
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become more and more dead burden now up until Roman law that cancellation it
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was the rule now exactly how frequently do you cancel debt varied across
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societies judaic Society the judaic Bible it’s every seven years in
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Babylonia apparently it was either 30 years or who with the death of the
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emperor and the rise of a new emperor you would start all over again so it’d depend on how long their lives were or
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30 years if they did not die sooner but with Roman law we got property law that
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protects the owners who obviously don’t like debt cancellation so ever since
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then we have protected the creditors and we eliminated debt cancellation
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substituting bankruptcy which is not nearly as good as debt forgiveness and
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so we have a problem of debt burdens that tend to grow over time and become
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unpayable debts in fact you’ve just reminded me I will link to our episodes on the organization the debt Collective
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who came out of Occupy Wall Street you may have heard of them Randy they started off as an organization called
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rolling Jubilee and so they were a fund they raised funds and then bought debt
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on the secondary Market student debt and medical debt and just canceled it and I
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thought that was a good teaching tool to show people okay this is what money is money is debt as you say Randy but then
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also great activism that reminds me of David grever’s book and this whole idea
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as well behind the history of money being really about kind of the conflict between debtors and creditors
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and how also much obviously much later than these societies that you’re discussing came this obsession with
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fixing the value of money because any kind of discrepancy in the value of money inflation in particular would be
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immoral in the sense that it would be repaying less to the creditors than you
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initially agreed to and obviously there’s a big theme there’s a word that keeps repeating in your book Randy your
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latest book Hallelujah yeah every time to describe the Redemption of the counseling of debts or the like you said
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the literal redemption in the monetary sense that we were talking about earlier so bringing it back to the here and now
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though the presser reporting this week that the bank of England are about to launch a four-month consultation on a
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digital pound nicknamed britcoin and I was struck by this sentence in your book
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the nature of money doesn’t really change when the Recording Technology changes and you touched on it a few
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beats ago but could you say a little bit more about that yeah today most of our records keeping is digital and so we’re
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not using tally sticks anymore we’re not using clay tablets and the number of transactions in cash is extremely
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infinitesimally small and young people don’t even know how to write a check so they don’t do that and so it’s almost
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all digital already it’s strange to meet the people think that this is a really
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new thing that central banks might decide to have digital coins instead of
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physical coins since again it’s just record keeping I think that moving to a
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system in which everybody has an account at the central bank and the say the
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technology the Privacy questions and just the
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management of in the case of the United States maybe 350 million Accounts at the FED those
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are things that that need to be discussed but digital coins is no big
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deal at all I think what a lot of people pushing this are concerned with is that
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crypto has been sold as a possible replacement money including for cash
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payments and I see crypto as really very
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little more than just fraud a Ponzi scheme a pyramid scheme whatever you
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want to call it I think that is a huge problem in the United States Gary Gensler is cracking down on it and I
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think that’s very important that we need to stop these fraudsters from separating
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people from their wealth it’s just another scam now probably a lot of your
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listeners are not going to like what I just said but that’s the way I see crypto I think we agree don’t we
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Christian absolutely yeah and I feel a lot of our listeners do I know that some listeners all okay central banks get
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things wrong so it would be great if there was no government intervention anywhere in the money system but as I’ve
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said before complaining about money being political it’s like complaining about water being wet
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but anyway so then there’s the Privacy issue and and the good thing about using
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government cash is that there’s a lot of privacy involved that’s also the bad thing about it because it can finance a
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lot of undesired illegal activity and so that’s a tough question Society might be
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better off if we didn’t have a way for people to hide their payments but I
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think that needs to be discussed seriously I know there’s the claim that
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well they can use modern techniques to keep everything Anonymous even if the
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accounts are with the central bank but we do know that the governments are pretty good at getting information that
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they want I think the issue of privacy is quite important particularly here I mean in the UK people rally up against
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the very idea of an ID the existence of one and the belief that there has to be
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a way of making transactions without anonymity is accepted as the right thing
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over here but the issue is that with cash at least and cash would have been the way to do that but with cash it’s
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very difficult to do that on a large scale whereas with a digital pound if it
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was Anonymous then you could potentially open up opportunity for fraud on a large
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scale so would you then say that cash and physical cash should always be
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retained as an option even if it does remain in very little use as a means of allowing those small transactions to be
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carried out as people prefer in an unlimited if they wish yes I definitely lean that way and I think we should keep
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the denominations of cash low because that makes it difficult to do the large
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ones and I think the large ones are the problem the small cash payments there could be under the table work and things
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like that so that you don’t report taxes is it illegal and it’s not desirable but
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the bigger problem is the huge cash payments so keep the denomination small
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and allow people to have some privacy in
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small payments but not allow privacy in the large payments I think that’s really
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the Crux of the issue that we have to look out for why the story is worth paid attention to whether or not the
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government is going to try and ban cash as far as I can see I can’t see the
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circumstances where that will come about now I know we sometimes go to shops where they go hey we’re completely cash
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free you have to tap your card or use your phone that I don’t think that’s the government driving that I just I think the
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government wants to have cash as much as private citizens do I don’t know what anybody else thinks there’s one other
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big issue that does support the use of
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government Central Bank digital money and that is that we have a large part of
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the population in the United States that is unbanked they don’t have bank accounts because of the fees possibly
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because they’re in rural areas in Indian reservations for example where they
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don’t have banks close by so I do think that we need an alternative to the
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private banking system and to cash to allow people to have free banking
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accounts so they can make payments so they can accumulate savings and so on and an alternative to using the central
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banks for this is to go back to the postal savings systems which many
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countries had we had postal saving system in the United States till the mid 60s there are post offices all over the
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place in the United States and Trump tried to close a lot of them down but Americans really like their post offices
26:44
and so we can use those for Banking and they can provide a lot of the services
26:51
that the unbanked part of the population needs and I think that’s probably a
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better alternative to trying to have an account for everybody at the central bank over here at the post office it
27:03
does provide some banking services but not serving the government but serving some smaller kind of commercial banks
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that don’t have offices branches or things that people can visit so they pay a fee to the post office and the post
27:15
office accepts payments or deposits on their behalf but the other thing is during the pandemic we had this kind of
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transfer payments to people and a lot of people were unreachable because of what you were saying Randy that they didn’t
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have bank accounts they certainly would fix that problem wouldn’t it yes so I
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think a free payments system that’s an alternative to the for-profit banking
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payment system is a really good idea and we know how to do it we used to do it and the Japanese postal Savings Bank was
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the biggest bank in the world I’m not sure if that’s still true so the models are out there for us to study and it’s
27:54
easy enough to do that so back to the book and turning the corner in the next chapter of the book which is entitled
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where does money come from you write to put it simply the Central Bank lends government money into
28:06
existence while the treasury spends into existence remember it this way the Central Bank lens the treasury spends
28:13
could you say more about that so a lot of people get confused over what central
28:19
banks and treasuries do and the discussion around the pandemic didn’t
28:25
help because a lot of pundits were saying oh well the central bank is
28:31
flying helicopters and dropping money into the economy and so that just
28:36
confused the issues it’s a treasury’s spent the pandemic relief money into
28:43
existence the central bank is the bank for the treasury so the way the treasury
28:50
spending actually gets paid for is that the central bank will credit the
28:57
reserves of your private bank and your private bank Bank credits your deposit I
29:04
think the majority of the payments in the U.S were electronic so that’s exactly how it occurred
29:10
on the other hand you might have gotten a check in the mail from the treasury so it’s a treasury’s check and you take it
29:17
to your bank you deposit it they credit your demand deposit and they send it on
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to the FED in the case the United States Bank of England and Britain and the
29:29
Central Bank credits the bank’s reserves that’s how the treasury spends now the
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central bank is involved in it but they’re just acting as the bank making
29:40
the payments for the treasury just like your bank will make payments for you you
29:45
could write a check to your landlord and your bank will make the payment for you so there’s nothing strange about this
29:52
the treasury as a bank you have a bank and the FED acts as a bank when it makes
29:58
payments for the treasury the central banks also do what we call monetary policy and that is different from what I
30:05
was just talking about which is called fiscal policy fiscal policy is spending
30:11
and taxing okay the central bank is involved in both of those but that is a
30:17
treasury operation the central banks do what we call monetary policy and in
30:24
monetary policy central banks lend Reserve herbs to the banks that need
30:30
them to make payments basically to each other that is how the Bank of America in
30:37
case your listeners don’t know Bank of America is a private Bank of the United States it has America in the name and
30:42
actually was founded by Italians in California but it is not a natural bank
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it’s a private bank so if Bank of America receives a check drawn on Chase
30:54
Bank Chase Bank will pay Bank of America using its Reserves at the fed the FED
31:03
will debit the Chase bank and credit the Bank of America reserves that’s how
31:09
payments are made between Banks and then finally Banks also use their reserves
31:14
when they make payments to the treasury so when you pay your taxes
31:19
the central bank will reduce your bank’s reserves so that’s what reserves are
31:26
used for the reserves have to get into the banks so that they can use them they can’t
31:32
create those those are only created by the central bank and the central bank can provide reserves to them in one of
31:39
two ways one is they can just lend up they just lend the reserves
31:45
and so a listener might say well where do they get the reserves to land they create them
31:50
they use a keystroke on the computer to credit their deposit account at the
31:58
central bank so it’s just created out of thin air you could say they lend those reserves to the bank that needs them to
32:06
make a payment either to the treasury for taxes or to clear checks with some
32:11
other bank the other way that they can provide Reserves is by buying something because when the
32:20
Central Bank buys something it creates reserves to pay for it the
32:26
main thing that they buy is government bonds so the central bank will buy a
32:33
treasury bond from a bank in order to put reserves
32:38
into that bank’s Reserve account so my guideline was to think of central bank’s
32:44
lending not spending they can lend the reserves directly or they could provide
32:52
reserves by buying bonds this might sound like spending but economists don’t
32:59
count that as spending because it is not a purchase that will go into GDP gross
33:05
domestic product all it is is the purchase of an asset that is just
33:12
exchanging one kind of asset for another kind of asset exchanging reserves for a
33:18
Government Bond we don’t call that spending it’s a monetary policy
33:23
operation so that’s the other way that they can get in to the economy so with that said you also add a caveat in the
33:30
book A minor exception to our rule that central banks lend and treasury spend is That central banks do buy a limited
33:37
range of financial assets but these purchases are undertaken to implement monetary policy not to move resources to
33:44
the government sector which is what fiscal policy is largely about now that’s what you were just talking about
33:50
as I understand it Randy yeah that’s right so they’re operating policy is to
33:56
bias as to put reserves in this has nothing to do with fiscal policy so following on from that I think it’s in
34:03
the same area but this might just be a UK thing but as part of the bank of England’s quantitative easing program on
34:10
top of buying government bonds with reserves or as we say an mmt swapping interest bearing pounds for non-interest
34:16
bearing pounds the bank of England also bought high quality commercial bonds I
34:22
wondered if you knew what their reasoning was for that because it confused a lot of people how is that
34:28
supposed to work in monetary policy terms they were not alone the ECB did it
34:34
the FED did it and the bank of Japan did it it’s called quantitative easing I would just say whatever they and I mean
34:41
all of those central banks whatever they thought they were doing it was bad policy they’ll say that they needed to
34:49
provide liquidity to the system or some such thing but if the system needed liquidity that
34:57
is more reserves the Central Bank ought to just lend them at the discount window the discount window it’s an old
35:04
it’s a historic term but that’s lending reserves by the central bank to a
35:10
private bank one of the goals of quantitative easing was to get the
35:16
interest rates down okay because we had just gone through the global financial crisis the economies were rotten and the
35:25
idea was if we can get the interest rate down really low people start spending
35:30
and we’ll get out of this recession okay so it’s some kind of logic to that but you don’t have to go out and buy a whole
35:38
bunch of private bonds we’re talking about trillions of dollars yen pounds
35:43
and Euros many many trillions were purchased by central banks they didn’t
35:49
need to do that at all to lower interest rates all they have to do is is say well
35:54
we think the 30-year treasury bond interest rate
36:01
ought to fall to 2.5 percent and what we’re going to do is stand ready to buy
36:08
enough treasury bonds to get that interest rate down to 2.5 percent okay
36:13
now are they gonna have to buy any the answer is no because no Market participant is going
36:21
to doubt that they can do that okay so the price of bonds will move such that
36:26
and again this would have to go deeply into Financial Theory we don’t need to do it the price of 30-year bonds would
36:34
have to move to the price that gives you an interest rate of 2.5 percent it’ll go
36:39
there immediately betting against central banks is the dumbest thing you can do because they have an unlimited
36:47
purchasing power to buy government bonds they will never run out of reserves they can always buy them so they’re going to
36:55
get the interest rate that they want but for some reason they thought they needed to go out and buy bonds okay they also
37:02
started buying private bonds so mortgage-backed Securities for example
37:08
and that was to get private interest rates down really low too again they
37:15
could have done the same thing although I’m not so convinced that this would
37:21
have been a good policy and I also suspect a little bit the bank of England’s claim that they’re buying high
37:28
quality commercial bonds I doubted that the Fed was buying high
37:34
quality mortgage-backed Securities so what if they’re doing is buying low
37:39
quality ones that have some probability of default what they really are doing is
37:47
bailing out parts of the private sector and I think that they probably were
37:52
doing that it’s corporate welfare it’s that and it’s very bad policy okay
37:58
people should have taken lawsuit they took great risks and there was lots of
38:03
fraud involved and they should have lost so they should not have been bailed out so I think the whole thing was misguided
38:11
at least and possibly you know an underhanded way to ensure that people
38:18
who had undertaken great risks didn’t suffer the consequences and now that
38:23
obviously the QE period has ended and I think well the UK certainly but I think
38:29
even the US has started a quantitative tightening can you explain maybe what
38:34
the purpose of quantitative tightening is is there any real point or is it simply sort of them trying to pretend
38:43
that things work in a certain way what’s the logic behind it so I don’t think quantitative easing really eased
38:50
anything and I don’t think quantitative tightening really tightens anything raising interest rates has impacts and
38:58
they are raising interest rates and we are seeing the impacts of that I don’t think that this is a precise tool at all
39:07
it’s like a sledgehammer and you’re not quite sure if you’re doing good or bad
39:12
with the sledgehammer so I don’t think that it’s the right policy to be raising
39:18
rates now but anyway raising rates is one thing and it has impacts but
39:24
quantitative tightening really does it I think there’s just a general belief that
39:30
we don’t want central banks to maintain these huge ballot sheets forever the
39:38
quantity of reserves in the United States used to be some number like 50 million and it went up to trillions okay
39:44
well that is the central bank’s liability they it’s offset on the asset
39:50
Side by trillions of stuff that they bought governments and private bonds and
39:56
so the idea is this just is abnormal for central banks to have such big balance
40:02
sheets and they’ve wanted to try to shrink them and in the United States we’ve had some what are called taper
40:09
Tantrums so taper means reducing the size of the fed’s balance sheet and when
40:14
the FED tried to do it the market reacted and interest rates went up temporarily in sort of a little tantrum
40:22
and I really don’t know why and I don’t think anyone really knows why the
40:28
markets want to keep tremendous amounts of reserves in the banks I don’t know
40:34
the answer to that I know that there is an excellent probably the best financial
40:39
journalist right now writing a book on it the author just asked me what I
40:44
thought and I told him you know boy I hope you can figure this out because I can’t so for most of the first decade or
40:50
so of your work on money it was all about the private money system as I read it in your latest book and how Bank
40:57
credit is created when Banks make loans and for people who come to the banking system through mmt this concept of loans
41:05
created deposits known as the endogenous money view can sometimes be a bit of a stumbling block and I think there’s a
41:12
confusion where some people think that Commercial Bank credit is side by side with Central Bank credit rather than
41:18
Central Bank credit being at the top of a hierarchy of Commercial Bank credit being below it as you talked about
41:24
earlier Randy so if we start with that primary mmt money story with a government needing to provision itself
41:31
and so it imposes tax liabilities on the private sector denominated in its own
41:36
money of account which only it can create and then that leads to people needing to sell goods and services to
41:42
get the government’s money to pay taxes with and that gives us our tax-driven state issue currency what might be a way
41:49
to integrate commercial Banks into that story first there’s the historical question which came first private Banks
41:58
or government and its money and the answer on that is very clear
42:04
authorities governments originally probably religious authorities is where
42:09
money started there are sort of Bank like things that go way back in time
42:15
modern Commercial Banking only goes back a few hundred years so I mean the
42:20
historical story is that definitely government money comes first and that
42:27
bank money comes later our banks at the same level in that pyramid as a central
42:32
bank will clearly know they are not the banks use the central banks liabilities
42:38
to clear with each other so they are below the central bank they need the
42:43
central bank to do the clearing the first two central banks in the world were created in for Sweden and then in
42:50
England and that was at the end of the 17th century in the United States we didn’t get our central bank until 1913.
42:57
we had a very backward Financial system of course we had a treasury and we had
43:03
treasury currency of different kinds over the years we did experiment with a
43:10
bank of the U.S twice but it was politically unpopular in certain ways
43:16
but anyway because we didn’t have a central bank like Britain did we had the
43:22
worst Financial history of any of the countries that became developed
43:27
capitalist countries because our banks had nothing to stand
43:33
behind them to ensure that bank money issued by Bank of America would clear at
43:40
par against Chase Bank at par means dollar for dollar a one dollar check for
43:47
makeup America it has the same value as a one dollar check from Chase actually
43:54
until the late 19th century Banks mostly issued notes rather than checking
44:02
accounts so if you took out a loan they actually printed up the note so they would look just like the five pound note
44:10
in written or one dollar note in the United States but instead of saying
44:16
Federal Reserve Note which is what our currency today says it would say Bank of
44:22
America note those notes did not circulate at par and when you started to
44:29
suspect that your bank was in trouble then maybe it had made a lot of bad
44:36
loans and that it couldn’t convert its own notes to U.S treasury notes at par
44:43
we would get a bank run and so every generation we had the equivalent of the
44:50
global financial crisis in the United States but with no Central Bank and so the banks would fail and or shut their
44:56
doors in Britain the bank of England existed again since the late 17th
45:03
century and by the early 19th century well no sorry say more like 1840. in the
45:10
Bank of England had realized what it could do to stop bankrupts and that is
45:15
to lend its own notes to the banks facing runs that would stop the bank run
45:21
and prevent a financial crisis so Britain could stop Bank runs the United
45:27
States could not our Fed was created specifically
45:33
to provide reserves to prevent Bank runs now they didn’t do it in the Great
45:39
Depression we had Bank runs anyway but there the problem was that the FED
45:46
didn’t think it should lend reserves to banks that were insolvent it should only lend reserves to banks that were solved
45:54
at but they were facing an irrational run like the Jimmy Stewart Savings Bank
46:00
in the movie It’s a Wonderful Life so anyway his bank was solvent in other
46:05
words he had the assets but the assets as he he tells the crowd that’s trying
46:10
to get their cash out the assets are the homes that he had financed with
46:16
mortgages and he couldn’t get that money back quickly he would have to foreclose on everybody’s homes so anyway the FED
46:24
didn’t really do the job in the Great Depression but the lender of Last Resort
46:29
is what it’s called principle was understood from the mid-19th century and
46:36
all the developed country central banks act as lenders of Last Resort in order
46:42
to stop Bank runs our financial crises now occur generally outside the banks
46:49
it’s in what we call the shadow banking sector so we still get financial crises and they can be extremely severe like
46:57
they were in the global financial crisis but generally they’re not in the banks
47:02
as a result of the failure of the FED to
47:07
prevent the Deep financial crisis and the Great Depression where half of all
47:12
the banks failed and closed up and depositors lost their money we created Deposit Insurance so this is
47:20
the treasury that promises to make good your deposits even if your bank fails so
47:28
we put that in place and so in the United States we haven’t had any Bank runs on FDIC Federal Deposit Insurance
47:36
Corporation insured Banks since the Great Depression so it works absolutely
47:41
we have had runs on banks that didn’t have FDIC insurance but we don’t have
47:47
any of those anymore in in Britain your listeners will remember you did have a run during the
47:54
global financial crisis that’s because you only had 90 insurance
48:01
and the feeling was well that’ll be good enough to prevent a run but depositors are rational do you want to lose 10
48:08
percent of your deposit the answer is no and so there was a run on on the bank to
48:14
try to get the funds out because nobody wanted to lose 10 percent and after that Britain and several other European
48:21
countries had to do the same thing they had to raise it to 100 percent so as long as you are below the upper
48:29
limit which in the U.S was raised I think to four hundred thousand dollars you can’t lose with an insured deposit
48:36
at all so that Deposit Insurance adds another layer of protection
48:44
so that even if your bank has done the craziest kind of lending and engaged in
48:49
massive fraud which is what they did before the globe financial crisis
48:55
you can’t lose your deposits so that is in addition to the lender of Last Resort
49:00
that makes the banks perfectly safe but I still wouldn’t put them at the top
49:06
of the pyramid because they rely on fed money to clear their own accounts they
49:14
can’t clear accounts using their own money and that puts them below the FED
49:19
in the way that I view things some people might say that sort of decreases
49:24
the incentive for banks to actually be run responsibly would you agree with
49:30
that well that is true but we’ve done several other things that reduce their
49:36
responsibility if you go back to say before the mid 19th century banks in
49:42
England the owners of the banks were liable for double their investment in
49:49
the bank so if you had invested say a hundred thousand pounds in the bank you’re liable for two hundred thousand
49:56
pounds if the bank failed that gave you a pretty good incentive to make sure the
50:02
bank was doing safe things well modern banks are corporations with
50:08
limited liability so the owners have nothing but their investment at risk you
50:15
can’t go after their wealth so we already reduce the incentive when we did
50:21
that when we allowed limited liability the argument was well then you can
50:26
increase your ability to raise Capital because many more people will be willing
50:32
to buy Bank shares if the only thing they can lose is their investment they can’t lose their own wealth all right
50:38
but that reduces the incentive for the banks to keep risk low adding the lender
50:45
of Last Resort reduces the incentive to maintain liquid positions adding the
50:52
deposit Insurance reduces the incentive for the depositors to make sure the
50:59
banks don’t engage in Risky Behavior but the reality is the depositors can’t possibly discipline in the banks anyway
51:05
for two reasons One banking is very complex
51:11
and the typical repositor can’t possibly understand what the banks are doing and
51:18
the second reason is there are privacy considerations so the banks can’t tell them who and how
51:26
much they have Lent so you couldn’t get the information even
51:31
if you had the capacity to evaluate the credit worthiness of the bank you can’t get the data so it’s just not
51:38
conceivable that the owners or the depositors of the bank can properly
51:44
regulate and supervise what the banks do that is why this has to be done by the
51:50
government you have to have the government Regulators in the United States so the FED is a regulator the
51:57
treasury is a regulator through the FDIC so the treasury is the insurer of the
52:03
banks they have the right to regulate them also the office of the Comptroller of the currency regulates the banks and
52:12
then the individual states regulate their Banks so we have a number of
52:18
levels of Regulation and I would say they do a
52:23
pretty good job with the small Banks they do a terrible job with the big
52:29
things and then on top of that if they try to do a good job in regulating a big
52:34
Bank the big bank has donated campaign money to very important senators and
52:42
house members and they will call on them to attack the
52:48
regulators and this is not I’m not saying anything hypothetical this is all
52:53
the way things actually work you can read the book the best way to rob a bank
52:58
is to own one by my UMKC Paulie Bill black laid it all out he was a regulator
53:04
and the owner of one of the banks that he was regulating actually put out a hit
53:10
on him so just getting the Senators to attack him they were called the Keating
53:15
five five senators were bought by this guy to tell The Regulators to leave him
53:22
alone that wasn’t enough they actually put out a hit on it there is a huge
53:27
problem with the big Banks so one is their political power and the other is
53:32
the complexity of what they do they have maybe thousands of offices all over the
53:38
world and they engage in extremely complex Financial transactions
53:44
that are hard to keep track of so they are a huge problem and I think there is
53:50
one obvious answer to that which is we should not have big Banks either limit
53:55
their size or just nationalize them yeah I think that there is a role for
54:01
National Banks public Banks State development Banks so that’s a good
54:06
alternative for some kinds of financial activities and then beyond that yeah break them up have a maximum size but
54:14
also Eric Des Moines uh he had a very good proposal which is regulate them
54:20
like we regulate dangerous drugs now dangerous banks are much more dangerous than dangerous drugs dangerous Banks
54:27
killed far more people than dangerous drugs they’ve ever killed so there’s a legitimate reason to do it but regulate
54:34
them like dangerous drugs you have to get approval before you can do it now that’s not the way that we
54:41
operate now we let them do whatever they want to do and then we decide later well have they killed too many people should
54:48
we Outlaw that problem that’s not the way to do it they force them to get approval first
54:55
and really look into it and then if you find out well that was a mistake we
55:00
shouldn’t allow them to do it then then yes take it away so we tell them what to do as opposed to tell them what they
55:07
cannot do yeah well I mean I’m not against all kinds of Bank Innovations so
55:14
a bank innovates a new product okay just like drug companies come up with a new
55:19
drug okay fine let’s take to the FDA uh in the case of drugs in the United
55:25
States and get approval the FDA does tests and decides whether it’s safe
55:31
enough to release do the same thing with financial products let them innovate all they want but they have to have approval
55:38
before they can use them so this is obviously why understanding the system is important because you’ve got to
55:44
understand it to see these things and so the full title of your book Randy is making money work for us how MMC can
55:51
save America but of course we’d also like to save the world and the good news about that is that your chapter that you
55:57
co-wrote with Yavin assisian in the brand new Gower initiative book mmt key insights leading thinkers that chapter
56:05
pushes back on this well-worn Canard that mmt only applies to the US because
56:10
the U.S issue the world’s Reserve currency and you lay out why that’s wrong and why mmt applies to all
56:17
currency issuing Nations could you talk about that yeah let me first say that this is why the omen is that we want to
56:24
make money work for us okay and so I actually didn’t come up with a subtitle
56:30
Publishers do that of course I don’t want to limit it to America but let me say money gives you power so The
56:40
Sovereign government issues money and issues the money that’s at the very top
56:45
of the pyramid and that gives them the power to do both good and bad they can
56:51
use that money to move resources in their favor hopefully in a democracy
56:57
they’re going to use that power to do good that’s what democratic authorities
57:03
are supposed to do they’re supposed to represent our interests to serve the public purpose now they’ve been failing
57:09
us it’s not all their fault Reagan in the United States Thatcher in Britain
57:16
turned people against the government and we’ve greatly
57:21
weakened their ability to serve us that is a huge problem and so I think it’s
57:28
important to say that we need to turn this around and we need to recognize
57:33
that we can use government to serve the public interest okay now turning to this frequent and false criticism that mmt
57:42
only applies the United States maybe Brit maybe Japan and so on and mmt just
57:48
ignores the developing World well that’s not true it is true that United States
57:56
economists have played a big role in developing mmt and a lot of the work has been focused
58:03
on the United States because we know the United States but obviously Bill Mitchell is not from the United States
58:10
he’s a from a small country now it’s not a developing country it’s a rich country
58:16
but in in many ways it faces some kinds of problems that smaller developing
58:23
countries face it’s an exporter of Commodities like a lot of developing
58:29
countries are so I think it was never a fair criticism anyway and now we have
58:34
more people who are explicitly applying mmt to developing countries so I don’t
58:42
think it ever was a fair crisis but anyway turning to the paper with
58:47
yeva what we argue is all countries face resource constraints so we have that in
58:53
common that’s true of the United States too as long as the government issues its
58:59
own currency and doesn’t issue debt in foreign currency then we would argue
59:05
that The Sovereign government is not financially constrained whether it’s the
59:10
United States or Australia Britain or a developing country it doesn’t face a
59:16
financial constraint it does have self-imployed constraints for example
59:21
typically we all formulate a budget that’s approved by the elected representatives and then in the case the
59:28
United States signed by the president and countries have all adopted operating
59:33
procedures that guide what the central bank and treasury can do or cannot do so
59:42
they have those kinds of constraints the reality is that most Nations don’t live
59:49
up to their resource capacity and I would include the United States plus
59:55
developing countries we’re all in that same boat we Face resource constraints
1:00:00
but we don’t even operate the economy up to those resource constraints in the
1:00:06
case of developing countries what they typically do is mistake balance of
1:00:11
payment constraints for resource constraints and that is why they operate
1:00:17
their economies with substantial slack that is unused resources especially
1:00:23
labor resources because they fear this balance of payment constraint and they
1:00:28
allow the current account position position to constrain their government
1:00:34
balance so they’re very worried about running a current account deficit the
1:00:39
balance of payment deficit is feared and rightly so to have exchange rate effects
1:00:45
so in other words if you persistently import more than you can export that can
1:00:51
have an effect on your exchange rate your currency will depreciate against
1:00:56
the dollar and so to some degree You could argue austerity that is trying to reduce
1:01:03
government spending to slow down economic growth to slow down growth of income so that your population doesn’t
1:01:10
buy as many Imports allowing your trade imbalance trade deficit to decline that
1:01:17
might be a reasonable thing to do but there are alternatives to that you could
1:01:24
instead restrict Imports put a limit on the Imports and prioritize what you
1:01:32
should Import in other words don’t import luxury goods import food for the
1:01:38
population so you could try to reduce your imports not by depressing income
1:01:43
and causing unemployment but by choosing to import what you really need and
1:01:50
restrict Imports that you don’t really need you also can use import
1:01:55
substitution there’s nothing new here this this is in all of the heterodox literature that you try to grow your own
1:02:03
food rather than importing food so Fidel kaboop has been arguing this that that
1:02:09
should be your top priority because typically the poorest countries are importing food so you can greatly reduce
1:02:16
your current account deficit if you can increase the production of food there is
1:02:22
this perception at least in Peru and possibly the rest of Latin America that your development is very much tied in to
1:02:30
your ability to obtain dollars so prioritizing obtaining dollars and
1:02:36
maximizing exports is seen as the key to development and of course that’s been the policy over the last few decades and
1:02:43
if anything our economies have become less varied and more specialized than we
1:02:48
used to be yeah so to a degree the poorer countries have to exchange real
1:02:56
exports for real Imports the reason is because the rest of the world doesn’t
1:03:03
want to hold Assets denominated in their currency for the United States and for
1:03:10
Australia and for Britain this isn’t true all of us can easily run current
1:03:16
account deficits we can import a lot more than we export because the rest of the world wants to hold Assets
1:03:23
denominated in our currencies so we’re not constrained by the amount of real
1:03:29
stuff we can export in a sense what we export is assets we allow the rest of
1:03:34
the world to own Financial assets and pounds or dollars and we can run current account deficits with no predictable
1:03:41
impact on our exchange rate as Alan greensman said we don’t have a model that can tell us what determines the
1:03:48
dollar exchange rate and that’s because the vast majority of transactions I think John Harvey said that it’s 98
1:03:56
percent of all dollar transactions around the world are in assets not in goods and
1:04:03
services so it’s not in traded stuff you might hold a U.S treasury bond because
1:04:10
you know that it’s an extremely safe asset you’re not speculating you’re just
1:04:15
going to have a return that you can count on now there’s lots of speculation there’s lots of hedging
1:04:22
exchange rate risk interest rate risk those are two of the biggest kinds of
1:04:28
derivatives out there but even those you wouldn’t necessarily have to say that
1:04:34
it’s speculation you may want to protect yourself from exchange rate movements and so you
1:04:40
can buy various kinds of financial products but yes there’s a lot of speculation it’s not all speculation but
1:04:46
there’s a lot of it so anyway the developing World generally there isn’t a
1:04:52
big demand for financial Assets denominated in their currency and so for them they do need to export
1:05:00
real stuff and they need to develop the capacity to export now International
1:05:06
charity should play a much bigger role the typical problem for a developing country is foreigners don’t want assets
1:05:14
denominating their currencies so they really can’t borrow in their own currency they got to get hold of dollars
1:05:19
to buy the Imports they need to try to develop their economy and I think that’s what you were saying about Ecuador and
1:05:26
the problem is that the interest rate is likely going to be above their growth rate and what that means is their debt
1:05:33
is going to grow faster than their capacity to pay their debt burden is going to increase over time they are
1:05:39
going to get into what Hyman Minsky called a Ponzi position where they’re going to have to borrow to pay the
1:05:45
interest the dollar interest that they owe which means their debt is going to grow even faster okay
1:05:51
it’s very hard to develop this way very difficult and of course the creditors
1:05:57
like that just fine because the real stuff is Flowing to them yes the Creditor Nation so they probably don’t
1:06:04
see it as like oh something’s going really wrong in this system right and at least on paper the debt is growing and
1:06:10
so the asset they’re holding is growing over time now of course we know what
1:06:16
happens we get defaults we get serial defaults among the highly indebted
1:06:22
developing world and as I said from Roman times on WE
1:06:28
generally don’t cancel the debts and so they default and unlike in the case of
1:06:35
say a business default you know Trump can go bankrupt many times and he walks
1:06:41
away from it and he’s perfectly fine we don’t have international bankruptcy laws that apply to Nations
1:06:47
and so Argentina defaults and one of its naval ships is seized right we don’t
1:06:54
have a way to deal with those defaults sometimes there’s some kind of debt relief but it’s on a one by one case and
1:07:02
it’s a haphazard thing and it keeps poor nations in poverty so we need an
1:07:08
alternative borrowing dollars to develop is it for most countries is not a path
1:07:14
to success instead we should have international charity we not lending but
1:07:20
support for developing nations so making money work for us how can mmt save the
1:07:27
world a big agenda but the point is the U.S can’t run out of dollars we can ship
1:07:36
an unlimited supply of dollars to any country in the world that needs dollars for development unfortunately our
1:07:43
leaders don’t see it that way so we have international agreements on how much Aid
1:07:50
each country should give relative to his GDP right to the developing world the
1:07:56
U.S consistently doesn’t live up to its promises why well we’re running out of money President Obama told us that he
1:08:03
said you know we would love to spend more but we ran out of money well this
1:08:09
is false we cannot run out if Ecuador needs dollars in order to develop its
1:08:15
economy we can’t run out of dollars to give that now what can we run out of the
1:08:21
same thing every country can run out of resources the real stuff we can’t run
1:08:26
out of dollars but we can run out of the real stuff so the question is if we sent
1:08:33
the dollars to Ecuador and Ecuador wanted to buy Machinery or whatever it
1:08:39
is to develop their capacity to take care of their own population the
1:08:44
question is could the U.S produce the real stuff stuff that they need and
1:08:50
right now the answer is pretty clear that we can in spite of all this worry about inflation and all the labor market
1:08:56
is too hot and so on WE remain on a downward Trend in terms of capacity
1:09:01
utilization when the economy did well in the past we would be up in the 80
1:09:06
percents above 80 say 85 percent of capacity over the past 30 years or so
1:09:13
our Peaks have declined to now we’re in the mid 70s that means we have 25 unused
1:09:20
capacity and the growth of capacity has been depressed because we have excess
1:09:27
capacity when firms already have more capacity than they can use they’re not
1:09:32
really inclined to produce more capacity so what I’m saying is that we have
1:09:38
excess capacity now already and we could ramp up investment which is part of
1:09:45
Biden’s buildback better plan which got translated into the inflation reduction
1:09:50
act you couldn’t sell it right yeah if you don’t want to build back better what a bad idea that want to reduce inflation
1:09:57
but fighting inflation okay yeah we want to do but anyway so there is some money there for infrastructure development and
1:10:04
for investment and so my point is that we can grow our capacity and I think we
1:10:11
can meet the demand of developing nations and so there is no reason not to ship them the dollars that they need and
1:10:18
it should be charity not loans so I think that understanding how money were Works does help us to resolve those
1:10:24
problems they do face real resource constraints and they face constraints in
1:10:32
terms of the external demand for their currency what they don’t face is a
1:10:38
constraint in the internal demand for their currency okay so at the same time
1:10:44
that the United States and other rich countries are helping them to develop
1:10:49
they need to utilize all of their domestic resources and they don’t need our currency for that they’ve got their
1:10:56
own currency so they should be using their own currency to mobilize all of
1:11:01
their domestic resources and they have the capacity to do that they can’t run out of their own currency I don’t know
1:11:08
if you travel to Latin American countries I’ve gone to a number of them and the first thing that is obvious is
1:11:15
that the reported unemployment rates mean nothing the actual unemployment rate is usually well above of 50 percent
1:11:23
okay people are working washing windshields at the stop lights and so on and five people helping you park your
1:11:30
car okay those people could all be put to work doing useful things and so I I
1:11:36
don’t want to completely let them off the hook either so we should do our part which is providing the dollars they need
1:11:42
and they should be doing their part which is employing all of their population and trying to develop their
1:11:48
economy I think that’s much preferable to the two kinds of strategies that
1:11:53
they’ve been forced to adopt right now which is either you borrow dollars and
1:11:59
you get an unpayable debt or you sell off your natural resources and devastate
1:12:06
your environment those are the two things that a lot of the developing world are doing now and that’s not in
1:12:12
their long-term interest it doesn’t increase their capacity to take care of their own people so I think both of
1:12:18
those strategies are failures I think part of the reason why employment rates
1:12:23
are quite meaningless is because of the degree of informality usually in these economies makes it really difficult to
1:12:30
monitor what the economy is actually doing yes and there’s no reason to have this huge informal sector because they
1:12:36
have their own currency they can mobilize them and formalize all of the work with a job guarantee which is a
1:12:44
whole other episode so moving into the home straight at the end of one of your
1:12:49
lectures from a few years ago that’s out there online which I really liked you rounded it off by saying let me tell you
1:12:56
what I didn’t say in this talk and then you list and correct a lot of the common
1:13:01
misconceptions about mmt which I thought was a great way to drive your actual points home and if you were to do that
1:13:09
now what would you say is the biggest misconception about mmt right now yeah
1:13:14
it’s really funny how after I give a talk people have heard things I never
1:13:21
said and so they well you said well no actually I never said anything like that anyway the biggest one now after the
1:13:30
pandemic and after global financial crisis when governments ramped up their spending at central banks really ramped
1:13:37
up their quantitative easing buying assets people said oh well now they’re
1:13:44
doing mmt it’s helicopter money the central bank is printing up money and
1:13:51
sending out relief checks to everybody in the case of the pandemic and flying helicopters around that’s mmt but that’s
1:13:58
not nmt at all so they saw mmt I think
1:14:04
so I’m trying to interpret what they meant they saw mmt as arguing that we
1:14:09
should change the way the government spends rather than having the treasury
1:14:15
spend we should have the Central Bank do the spending and so the treasury wouldn’t need tax revenue and wouldn’t
1:14:22
need to borrow dollars the central bank would just print up the dollars and spend them for the trade that’s mmt well
1:14:29
no part of that is mmt so first we’ve actually for the most part we don’t
1:14:35
recommend changing any of the procedures what we do is we describe the way things
1:14:40
work right now and we say and it’s perfectly adequate the procedures we
1:14:46
already had are perfectly adequate to allow the
1:14:52
government to spend more on things like the green New Deal on pandemic relief on
1:14:57
a job guarantee we can do all of those things with the current operating procedures no changes required
1:15:04
whatsoever all we need is for congress in the case of the United States to
1:15:09
approve more spending that’s all it takes once it’s approved the treasury and fed know how to do it they don’t
1:15:16
need to change any part of their procedure okay now it’s true some mmt people have recommended getting rid of
1:15:25
Treasury bonds okay that doesn’t really significantly change
1:15:31
the procedures so right now when the FED makes a payment for the treasury
1:15:38
it credits A bank’s reserves and the bank credits the deposit account of the
1:15:43
recipient we generally then sell a bond to train those reserves out of the banks
1:15:52
before 2009 the FED had to do that because otherwise the overnight interest
1:16:00
rate which in the United States called the FED funds rate most countries call it the bank rate that will drop to zero if
1:16:08
there are excess reserves in the banking system because you’ll have Banks wanting to lend reserves but no Bank wants to
1:16:16
borrow reserves because they’re all in the same situation they’ve all got more reserves than they need so the bid will
1:16:23
drop to a zero and the interest rate will be zero and in normal times fed doesn’t want a zero interest rate so it
1:16:30
will sell bonds to take the excess reserves out beginning in 2009 the Fed
1:16:35
was allowed to pay interest on reserves so now the interest rate can only go down to the interest rate the FED is
1:16:42
paying on reserves that becomes the floor rate so all the FED has to do is raise that flow rate to whatever it
1:16:48
wants the interest rate to be and it will never drop below that we don’t need the bond sales anymore so eliminating
1:16:55
the bond sales would have no impact on the fed’s ability to make interest payments it has no impact on the
1:17:04
treasury’s ability to continue to spend because the FED can continue to credit
1:17:09
Bank Reserves okay so it doesn’t really change anything that’s very important
1:17:15
the only question is whether you think that there’s a role for bonds to play in
1:17:20
the economy other than keeping the interest rate above zero maybe there is I think that there could be do we want
1:17:29
at least some entities in the private sector to be able to hold a perfectly
1:17:36
safe Government Bond and earned interest but wouldn’t that role be filled by
1:17:41
reserves now no because only banks can hold reserves okay so if you’re a
1:17:46
pension fund Pension funds like to hold some government bonds as their safe
1:17:52
asset and then they can buy some risky bonds to get a higher return okay so to
1:17:58
raise their average return above what government bonds can make household Savers generally don’t like a lot of
1:18:04
risk but they want to get some interest and so should we allow Savers to hold
1:18:12
some U.S savings bonds when I was a kid we would take a quarter to school
1:18:18
and they had this little envelope with slots you put the quarter in and when
1:18:23
you got 1875 uh you could exchange that for a U.S Saving Bond Worth 25 dollars seven
1:18:32
years later and so we saved that way do we want to allow that to promote private
1:18:37
saving in a perfectly safe asset and importantly at an interest rate the
1:18:44
public policy chooses I think the answer is yes rather than forcing people to take risks
1:18:51
with Wall Street let’s give them a safe alternative let them save and we give them a good interest rate why well
1:18:57
because Uncle Sam can afford it he’s not going to run out of money let’s give him a good interest rate let him save in U.S
1:19:05
savings bonds so I still see a role for government bonds to play in the economy maybe it’s a much reduced role compared
1:19:12
to what it is now maybe it would be we put an income limit so you can’t buy these things if your income is above
1:19:18
fifty thousand dollars or something like that and only Pension funds not other kind of Shadow banking entities would be
1:19:26
allowed to buy them so I would leave that open and obviously it’s a democracy so Congress would decide who would be
1:19:32
allowed to purchase these things and what the interest rate would be but anyway getting back to the main topic
1:19:38
the other thing I don’t like is saying that the pandemic relief was mmt policy
1:19:44
and that is just false even I very explicitly I think it was in March the
1:19:50
pandemic had just hit we laid out a strategy an MMP strategy for dealing
1:19:56
with a crisis and there were no helicopters in that strategy there were no relief checks to be mailed to
1:20:04
everybody in that strategy that was not mmt strategy we warned that mailing
1:20:10
checks to everyone was a bad idea and could be inflationary it was being sold
1:20:15
as a stimulus we said we don’t need a stimulus the supply side has collapsed
1:20:21
the last thing on earth we need is to stimulate demand when there’s no Supply
1:20:27
so it was not an mmt policy we wanted targeted spending and in fact mmt has
1:20:34
always argued for targeted spending has never argued for was called pump priming
1:20:40
just indiscriminate pumping up agrid men we have never advocated that that could
1:20:46
easily be inflationary even if you’re not at full employment because you’re not targeting the spending where it’s
1:20:53
needed so you will get bottlenecks you will get demand exceeding Supply
1:21:00
in parts of your economy so that’s a very bad policy it’s not an mmt policy
1:21:06
and of course the mmt policy prescription being the job guarantee and I’ll link to our episodes about that and
1:21:12
just share notes for this episode and there’s so much more to talk about from your book Randy and speaking for me and
1:21:18
Patricia we would love to talk for hours but we know that time is finite so we’ll
1:21:23
have to leave it there for now so we’ve been speaking with Professor L Randall Ray principal architect of literally mmt
1:21:30
itself and now author of a fantastic new general audience book making money work
1:21:35
for us how mmt could save America and co-author of the more in-depth academic
1:21:41
collaboration modern monetary Theory key insights leading thinkers both of those
1:21:47
books are essential reading so we’ll link to where you can get hold of them in the show notes for this episode but
1:21:53
for now thanks so much for joining us today on the mmt podcast Professor L
1:21:58
Randall Ray thanks a lot it was fun on
1:22:04
[Applause] [Music]
1:22:10
that was the mmt podcast with Patricia Pino and Christian Riley
1:22:15
don’t forget you can support the show through patreon starting at a dollar a month and get access to Patron only
1:22:22
episodes you can do that by going to patreon.com mmt podcast you can also
1:22:28
find me on Twitter at mmt podcast and you can find Patricia on Twitter at
1:22:34
Patricia npino and you can email us at mmtpodcast outlook.com thanks for listening and we
1:22:42
hope to hear from you [Music]
1:22:54
thank you
Randall Wray-k idazten duen moduan, Making money work for us, 145 or., “Whar matters is resoursez, not money”, alegia, “Axola duena baliabideak dira, ez dirua.”
